Fair Value Measurements

6 Months Ended

Jun. 30, 2020

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 3. Fair value measurements

Financial assets and liabilities are recorded at fair value. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities;

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

Financial assets and liabilities measured and recognized at fair value are as follows (in thousands):

	June 30, 2020
	Total		Level 1		Level 2		Level 3
Assets:
Money market funds	$	174,821	$	174,821	$	—	$	—
Total financial assets	$	174,821	$	174,821	$	—	$	—
Liabilities:
Embedded derivative	$	1,124	$	—	$	—	$	1,124
Total financial liabilities	$	1,124	$	—	$	—	$	1,124

	December 31, 2019
	Total		Level 1		Level 2		Level 3
Assets:
Money market funds	$	191,157	$	191,157	$	—	$	—
Total financial assets	$	191,157	$	191,157	$	—	$	—
Liabilities:
Embedded derivative	$	1,165	$	—	$	—	$	1,165
Total financial liabilities	$	1,165	$	—	$	—	$	1,165

Since the embedded derivative liability is the Company’s only Level 3 financial instrument, the following disclosure regarding the embedded derivative liability outlines the activity related to Level 3 financial liabilities of the Company.   

Embedded derivative liability in the loan payable

For the SVB and Hercules Loan Agreement entered into in November 2019 (see Note 5), the Company determined that the requirement to pay a Success Fee upon certain events is an embedded derivative liability to be measured at fair value. The fair value of the derivative was determined based on an income approach that identified the cash flows using a “with-and-without” valuation methodology. The inputs used to determine the estimated fair value of the derivative instrument were based primarily on the probability of an underlying event triggering the embedded derivative occurring and the timing of such event. The embedded derivative liability was $1.1 million at inception in November 2019 and $1.2 million for the year ended December 31, 2019. The following table sets forth a summary of the changes in the fair value of the Company’s embedded derivative liability in the loan payable for the three and six months ended June 30, 2020 (in thousands):

Derivative instrument:
Beginning balance - December 31, 2019	$	1,165
Change in fair value upon revaluation recognized in other income    (expense), net		(62	)
Balance March 31, 2020		1,103
Change in fair value upon revaluation recognized in other income    (expense), net		21
Ending balance - June 30, 2020	$	1,124

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value Estimate		Valuation Technique	Unobservable Input	Range of probability
Dollars in thousands
June 30, 2020	$	1,124	Appraisal	Appraisal adjustments	0%-75%
December 31, 2019	$	1,165	Appraisal	Appraisal adjustments	0%-75%